As was discussed in previous articles, in order to maximize collateralization of loans, lenders may look to infrequently utilized forms of security. This article focuses on security interests in marine vessels subject to federal laws of priority and enforcement. As stated previously, it is imperative that lenders understand the steps to take to protect interests in such collateral.
While article 9 governs the creation, attachment and validity of a security interest in a marine vessel, it is federal law, specifically, Title 46 of the United States Code, captioned "Shipping," which governs both priority and enforcement of liens on certain larger, documented vessels. This article will focus on these particular vessels.
National Vessel Documentation Center
The United States Coast Guard acts as a recording agency with regard to ship mortgages through its administration of the National Vessel Documentation Center ("NVDC"), located in West Virginia. Only certain ship mortgages may be filed with NVDC. The subject vessel must either have a Certificate of Documentation through NVDC or be the subject of an application for documentation with NVDC. The laws governing documentation of vessels are found at 46 U.S.C. §§ 67.1 et seq., and essentially state that a vessel may be documented if it is at least five tons. A vessel must be documented if it is at least five tons and is engaged in fishing.
If a vessel is documented through NVDC or is the subject of a pending application for documentation), the ship mortgage must be filed with the NVDC to be valid against third parties having no prior notice of the mortgage. Importantly, this federal recordation is essential to perfect the lender's interest as against a bankruptcy trustee.
To be filed through NVDC, a ship mortgage must meet the following requirements (46 U.S.C. § 31321):
If the ship mortgage meets the above requirements it will be considered a preferred mortgage. 
While there is no government form for a ship mortgage, a lender may file an Optional Application for Filing Form, CG-5542, which is attached hereto. If this application is properly completed and attached to the mortgage, the mortgage will be filed with NVDC and recorded with no further review. Perfection of the mortgage occurs at the time of filing with NVDC. Only a copy, and not the original, of the mortgage need be presented for filing and recordation.
If a mortgage is filed as to a vessel for which an application for documentation has been submitted, and the Coast Guard thereafter rejects the application for documentation, the Coast Guard will give notice to each interested party to the mortgage allowing ninety days to correct any defect. As a practical recommendation, lenders should obtain powers of attorney which allow them to cure any such deficiencies.
Upon default of any term of the preferred mortgage, the mortgagee may: (1) bring an in rem admiralty action against the vessel in federal district court; or (2) may enforce a claim for the outstanding indebtedness secured by the mortgaged vessel in federal district court. In rem actions against the vessel may only be brought in federal district court, which enjoys original jurisdiction over such actions. In rem actions are actions directly against the vessel, rather than the owner of the vessel and seek satisfaction of the indebtedness out of the vessel itself.
When a vessel is thereafter sold by an order of the federal district court, any claim existing on the date of the sale is terminated and the vessel is sold free and clear of all such claims, with the claims attaching to any proceeds from the sale. Typically a documented vessel may be sold by a federal district court to a mortgagee. However, unless waived by the Secretary of Transportation, a person purchasing a vessel from a mortgagee must thereafter document the vessel with NVDC. This restriction does not apply to a documented vessel operated only for pleasure.
Lenders may also seek state court relief to enforce a claim for indebtedness against obligors and may utilize Article 9 enforcement procedures to sell a vessel, rather than utilize the federal court system. However, to the extent a lender seeks a judgment against the vessel itself, i.e. in rem relief, it must utilize the federal system. One benefit of in rem relief includes obtaining personal jurisdiction over the vessel to satisfy the indebtedness, even when the owner of the vessel is otherwise outside the reach of the court.
Sufficient due diligence should be exercised prior to taking a ship mortgage. Just as with other types of real and personal property collateral, title to the vessel should be searched to understand what sorts of liens and interests may already be in place against the potential collateral. A lender should order an abstract of title through NVDC to obtain all bills of sale, ship mortgages and liens encumbering the vessel which is to be pledged. Additionally, because certain personal property items on board a vessel may be subject to UCC lien priority, a UCC lien search should be conducted.
Marine vessels can provide a valuable source of collateral to lenders, however, given the special rules involved for perfection and enforcement if such security interests, it is imperative that lenders understand the steps to take to protect their interests. Lenders must know whether the vessel is subject to the federal scheme. If not, the Uniform Commercial Code governs and the filing of a financing statement will be necessary to perfect a lender's lien on the vessel.
In addition to marine vessels, aircraft involve special rules to perfect a lender's interest in such collateral and so we will focus on that topic in a later article. Obtaining the advice of the bank's counsel is recommended if and when questions arise as to these uncommon forms of collateral.
 To the extent a vessel is not covered under 46 U.S.C. §§ 67.1 et seq., the Department of Game and Inland Fisheries regulates boat registration and titling. http://www.dgif.virginia.gov/boating/registration/
 "A preferred mortgage is a mortgage, whenever made, that
(1) includes the whole of the vessel;
(2) is filed in substantial compliance with section 31321 of this title [46 USCS § 31321];
(A) covers a documented vessel; or
(B) covers a vessel for which an application for documentation is filed that is in substantial compliance with the requirements of chapter 121 of this title [46 USCS §§ 12101 et seq.] and the regulations prescribed under that chapter; and
(4) with respect to a vessel with a fishery endorsement that is 100 feet or greater in registered length, has as the mortgagee--
(A) a person eligible to own a vessel with a fishery endorsement under section 12113(c) of this title [46 USCS § 12113(c)];
(B) a state [State] or federally chartered financial institution that is insured by the Federal Deposit Insurance Corporation;
(C) a farm credit lender established under title 12, chapter 23 of the United States Code [12 USCS §§ 2001 et seq.];
(D) a commercial fishing and agriculture bank established pursuant to State law;
(E) a commercial lender organized under the laws of the United States or of a State and eligible to own a vessel for purposes of documentation under section 12103 of this title [46 USCS § 12103]; or
(F) a mortgage trustee under subsection (f) of this section.
 Except for expenses and fees allowed by the court, costs imposed by the court and preferred maritime liens. 46 U.S.C. § 31326(b).